[This post was first published in the Fairfax NZ Sunday Star Times on 4 May 2014]

The current situation in the meat industry reminds me of two famous phrases from the First and Second World Wars. From the First World War, came the term ’all quiet on the Western Front’. And then early in the Second World War there was the ‘phony war’. Both were periods of quiet while the protagonists geared up for major battles. All parties knew that it was actually the quiet that was phony.

The current situation in the meat industry is similar. Eventually hostilities will inevitably break out as the processing and marketing companies compete with each other for survival. In beef there is scope for most to survive, but in sheep meat there have to be casualties.

Late last year in these columns I wrote about some of the challenges of the post-farm-gate red meat industry. I wrote about how the farmer-led Meat Industry Excellence group (MIE) was advocating a mega co-operative but there was no agreement as to how to bring that about. I also analysed the historical five year profits of the three major processors who have to publish their accounts – the two co-operatives Alliance and Silver Fern Farms, and the overseas-owned ANZCO. The key finding was that overall profits have been woeful. The fourth major company is the Talleys-owned AFFCO which as a private company do not publish their accounts.

Extrapolation from the published accounts of both major and minor companies indicated that overall losses in 2012 were about $200 million which wiped out combined profits from the three previous years. This was followed in 2013 by small profits at Alliance and ANZCO but another large loss of $28 million by Silver Fern Farms.

I suggested back then that the most likely long term outcome eventually was that at least one significant company would not survive. No company has the capacity to itself solve the problems. Accordingly, the crash will come when the banks remove their support from a key player.

Now, some six months later we are mid-way through the 2013/14 meat industry year. It is time to take stock of what has happened. Largely it has indeed been ‘all quiet’.

Lamb meat exports are down 2.5% by volume from last year, but the export price is up by 14%. These prices have flowed through to farmers with lambs worth about $15 more at $100. Farmers are still not satisfied, but the anger towards the meat companies is more muted than a year ago.

The big movement this year has been in mutton volumes which are up 26%. This means the early season ewe kill has increased by more than half a million. This is a worry for the industry, because it says that farmers are selling their capital stock – the breeding females that produce next year’s lambs.

The other big change is that increasingly the sheep meats are being exported bone-in, with carcasses split into a basic ‘six cut’. This is because 35% of the lamb and 72% of the mutton has gone to China, with the Chinese preferring to do their own boning-out. In New Zealand, the number of jobs in the meat works is therefore declining.

For the same six month period, the beef exports are almost unchanged from last year both in volume and price. The beef industry is now predominantly an off-shoot of the dairy industry, with only one million beef cows and five million dairy cows.

So far this year the meat companies have been disciplined in their buying behaviours. None of the majors will be formally reporting their 2013/14 first half results, but the unofficial word is that most of the companies are trading above the line. There have been profits to be made in sheep processing and marketing, but apparently the North Island beef operations have been challenging.

However, in the meat industry it is often the last few months of the year which prove the most difficult, and these are the months now in front of us. This is the period when companies have to sell their meat inventories for which they have already paid the farmers. Given that some companies are undoubtedly under liquidity constraints from their bankers, the prospect of discounting in the market is always a worry.

The key to future profitability of the meat processing companies will be rationalisation of slaughter and processing capacity. However, farmers will not benefit directly from that. Excess killing capacity leads to procurement wars that increase farm-gate prices. From a farmer perspective, this excess capacity also comes in very handy in drought years. What is good for processors is not necessarily good for farmers.

If there are benefits to famers then these will be in the longer term. Those benefits will depend on whether a more profitable processing and marketing sector chooses to re-invest its profits in market development.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.